Markel Group Inc (MKL) 2007 Q3 法說會逐字稿

Greetings, Ladies and Gentlemen, and welcome to the Markel Corporation third quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steve Markel, Vice Chairman of Markel Corporation. Thank you, Mr. Markel, you may now begin.

Thank you and I'd like to welcome all of you to the third quarter conference call. I'll open with our normal Safe Harbor statement.

During our call today we may make forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is described under the captions 'Risk Factor' and 'Safe Harbor and Cautionary Statements' in our most recent Annual Report on Form 10-K and quarterly report on Form 10-Q.

Our quarterly report on Form 10-Q, which is filed on our website at www.markelcorp.com, also provides a reconciliation to GAAP of certain non-GAAP financial measures, which we may discuss today.

Our process today, our format will be very much the same as in prior quarters. I'll make a couple of additional comments, but we'll quickly turn it over to Richie Whitt, who will review our financial results. Tony Markel will talk about our operations and the status of the insurance markets around the world. Tom Gayner will share with you his investment insights. I'll wrap it up with a few additional comments as well as moderate the question-and-answers.

The third quarter was a very good quarter. We had no hurricanes, good underwriting results, real pleased with the overall -- the way things went, and I'm sort of searching for a headline and it showed up in my in-basket this morning where I received a copy of our earnings results, which was sent to all Markel associates. And the cover note simply said, "Please note that the five-year countdown to annual growth rate and book value per share measured at September 30, 2007 was 17%."

I think that summarizes the way we think of our business. We try to maintain a long-term focus. We're looking at growing book value per share at a high rate over a long period of time and we're absolutely on track to do that today and continue to do that in the future.

With that, I'll turn it over to Richie and you can make your comments about the quarter and nine-month results.

Thanks, Steve. Good morning everyone. I'm going to follow the same format as in past quarters and I'll comment primarily on our year-to-date results. I'm going to start with our underwriting operations, move on to investment results, and then bring those two areas together with a discussion of our total results for the nine months of 2007.

As Steve alluded, the market continues to soften. However, we had a very strong first nine months of 2007. Our gross premium volume decreased 6% to $1.9 billion in the first nine months of 2007. This was primarily due to continued competition in the U.S. and international Professional Liability and Casualty line, as well as certain of our Property lines.

Net written premiums also decreased by approximately 5% to $1.6 billion. However, our retentions were higher through the first nine months at 87% compared to 86% last year.

As a result of the decrease in gross written premium, our earned premiums were down 2% to $1.6 billion for the first nine months of the year compared to 2006.

Our combined ratio was an 88 combined for the nine months of 2007 and 2006. Our 2007 combined ratio includes approximately 9 points, or $138 million of prior-year redundancies. These prior-year redundancies were partially offset by about $34 million of development on asbestos claims. Our 2006 combined ratio included 3 points, or approximately $53 million of 2005 hurricane loss development and $17 million of strengthening of asbestos reserves. These items last year were more than offset by prior-year redundancies in other areas of the business.

Our current accident-year loss ratio was 61% for the first nine months of 2007 compared to 59% in 2006. The higher current year loss ratio primarily reflects price deterioration across many of our product lines. The increase in our current year loss ratio was more than offset by additional favorable loss development in prior years.

As has been the case for the last several quarters, the largest area of prior-year loss redundancies was in our Excess and Surplus line segments, specifically the Shand Professional Products Liability unit and our Casualty programs of the Essex Excess and Surplus lines unit.

Markel International had another strong quarter of underwriting profitability. They contributed $16 million of underwriting profit in the third quarter this year and $32 million of underwriting profits year to date. They're having a great year.

Our expense ratio increased to 35% from 34% in 2006. This was primarily due to the lower earned premiums for the first nine months in our operations as well as higher compensation costs.

Turning to the investment results, our average invested assets increased to approximately 13% for the first nine months of 2007 to $7.6 billion. Investment income was up 16% to $235 million.

Realized gains were $65 million for the first nine months, primarily comprised of a few equity sales. And unrealized gains were down $91 million before tax, primarily due to declines in our fixed income portfolio and the before-mentioned equity sales. Tom will go into this in more detail in his comments a little later.

Looking at our total results for the nine months of 2007, we reported net income of $312 million compared to $271 million in 2006.

Book value per share increased approximately 12% for the nine months to $257 per share at September 30, 2007.

Turning to the balance sheet and cash flow, I'll make a few comments regarding operating cash flows. They were $383 million for the first nine months of the year, compared to about $362 million last year. This increase was primarily driven by strong operating cash flows from Markel International.

Two other comments on the balance sheet very quickly. Our reinsurance recoverables continued to decrease and are approximately 47% of shareholders equity at September 30th. This was a result of continued strong collections, collections on the hurricanes as well as commutations and our efforts to deal with old legacy issues at Markel International.

Debt to total capital also decreased and was 21% at September 30, 2007.

That really does it for my comments. At this point I'll turn it over to Tony to talk more about the operations.

Thanks Richie. Basically, Richie stole all my thunder. The numbers and the marketplace continues -- the numbers are positive. The marketplace is still very, very difficult. As he reported, the third quarter was another gratifying one for us, reflecting diluted earnings of $9.26 per share and $31.28 per share for the nine months compared to $27.24 for the same period in '06.

And it gained, a little bit redundant, but underwriting results continued to show strength with combined ratios of 87% for the quarter and 88% for the nine months.

As he also indicated, gross premium volume, not surprisingly, given the extremely competitive environment, was down 5% for the quarter and 6% for the nine months compared to the same periods in '06.

Unfortunately, we just don't see any abatement in the competition, which candidly is prevalent in virtually every sector, virtually every coverage, and affects virtually every one of our subsidiaries. In an effort to combat it, our marketing efforts continue with a strong pace to counteract this cycle.

I reported last quarter on a couple of small acquisitions that we think are ultimately going to be real homeruns for us, although relatively immaterial at this stage. And I'll comment and say that we continue to seek and look at and get the opportunity to view a number of acquisition opportunities, but candidly, the prices that are being paid at this stage in some of these sectors seem unrealistically nave to us, preventing or at least limiting the opportunity for accretion. We continue to look in that arena.

I think we're dealing effectively with this difficult market, even though we're disappointed with the reduced volume. But I know I sound like a broken record, but we will not sacrifice underwriting integrity for top-line growth, which many of you have heard ad nauseam, and it continues to be the watch word.

And with that I will turn it over to Tom.

Good morning. Thank you, Tony. I'm pleased to report to you that in these tumultuous times in the credit and investment markets, our news is rather boring. And believe me, boring is good.

Our total investment returns, including the positive effects for foreign currency denominated securities during the first nine months was 4.2%. Earning at that sort of rate over nine months, coupled with ongoing underwriting profitability, certainly supports our long-term goals for growth in the book-value-per-share at Markel.

On the fixed income side, our longstanding conservative approach served us particularly well. As you've heard me say before, we own a high-quality portfolio of fixed income securities. Our normal allocation is roughly one-third government and agencies, one-third Munies, and one-third corporates. We did not and we do not rely on ratings or rating agencies to get comfortable for structured financial products and we fortunately don't have any news to report to you on that front. We really just aren't in that game and that is, as market [sayers] might say, 'a very good thing'.

In the past we have increased our allocations to corporate debt securities and we felt we were paid to take the risk for doing so. To opportunistically increase our commitments to corporate, a big enough spread appeared to make that an attractive idea. As of yet we don't see that opportunity.

On the equity side, we earned 2.9% for the first nine months of the year. This is well below the S&P return of 9.1% for the first nine months, and clearly we would prefer to be above rather than below this benchmark.

Fortunately, in the almost 20 years that we have investment return data, we've exceeded this index by an annual average of over 200 basis points. We've had several years where we've been below the index to go along with the years we've been ahead of the index, and this is almost always the case for all great investors.

I'm confident that our value-based disciplines will continue to serve us well and I would happily sign up for the next 20 years to be anything like the last two decades.

Specifically, in 2007 we benefited from our two largest equity holdings -- Berkshire Hathoway and General Electric. Their financial strength and global business footprint served us well and I expect they will continue to do so.

We tend to run a concentrated portfolio and the weakness in 2007 and the price of [CarMax] detracted (inaudible) from our returns. I remain confident in their long-term business model and ongoing expansion. I'm happy to be an owner of that company as they continue to build out their dealership network from one location to 10 locations to the next order of magnitude or two.

Finally, with minimal positions in energy, commodity and technology, and large positions in financial businesses, 2007 is not the kind of year which we will shine. As I mentioned earlier though, we remain profitable and the decades have been kind. Today we are investing in high-quality global growing businesses that oftentimes carry dividend yields as much as, or more than, its income alternatives. We're back to the future of the 1950s in this regard and it makes me very optimistic about long-term perspective equity returns.

We continue to steadily invest in equity securities and I see an attractive pallet of those public and private opportunities for Markel.

Thank you and I'd be happy to entertain any questions during the q&a period. With that, let me turn things over to Steve.

Thank you, Tom and Richie and Tony. A few comments before we open the floor to your questions and we assume that you look forward to doing so. But I'd like to make a few comments about Markel's balance sheet.

The quality of our financial statement has never been higher. Our balance sheet is strong and positioned to allow us to take advantage of opportunities that come in the future and continue to perform as we have in the past.

The investment portfolio at September is now at $7.7 billion, so there is a large amount of cash in investments working to support our growth and returns and to compound shareholders' value over time.

Our loss reserves are as strong as they have ever been. In each of the last several years we've had the benefit of having releases from prior years' reserves and having favorable development on our prior picks. Markel's philosophy has been and continues to be to try to establish our loss reserves at a level that will prove to be more likely redundant than deficient. And the margin of safety in our reserves today is certainly as strong as it's ever been.

Our international operations, which, as most of you know, struggled for a few years, have now reported several years of continuing improvement. We're finding now that our reserve position in our UK operations, our international operations, are as strong as they are in the rest of the organization, and that is a wonderful position to be in.

So overall, I feel very, very confident that we have a solid reserve position. While we have benefited in the past from redundancies, we certainly would hope that that is a trend that would continue.

And finally, Markel's capital strength is as good as it's ever been. We've reduced our debt over the last year as we've had significant cash flow from our businesses. We've invested that cash flow both in the investment portfolio and in the reduction of debt, so our debt leverage today is lower than it's been in quite some time and book value per share now reaches $257 a share.

We're in great shape to take on opportunities that we'll see in the future. And as the market softens, undoubtedly, we will see more and more and more opportunities to take advantage of future opportunities.

With that I'd like to open the floor to your questions and we look forward to responding.

Thank you. (OPERATION INSTRUCTIONS). Beth Malone with Keybanc Capital Markets.

Good morning and congratulations on the quarter. I would like to know about the -- do you have any feel on the wildfires in California? Did you all have any exposure there?

Yes, Beth, very low comparatively. I mean, we've got some small commercial properties. Not particularly involved in residential out there. And the last time Richie did sort of a review, which was three or four days ago, it's immaterial.

Okay. And then, on the pricing environment, do you -- what do you see as being a catalyst to either stabilize pricing or cause them to go back up? Do we have to have a catastrophic event to remove the capital, or are there other factors that might play into it?

Your guess -- I though 10 years ago that -- I publicly made the statement five years ago that I thought the industry was much, much better run than it had been in the past and that the amalgamation within the industry was producing solid management who understood the necessity of underwriting profits, and that I'd probably seen my last overly aggressive soft market in my career, and unfortunately, I was premature and nave.

I saw something the other day where somebody opined in one of the trade journals that it would take an event in terms of erosion of capital, be it catastrophe or a portfolio reduction, or whatever, to the tune of about $125 billion to get somebody's attention. But, God, who knows? I mean, we just deal with it as it comes. Unfortunately, we don't have control over the exterior environment.

Okay. Yes, that's a little depressing. What do you -- do you see a different pricing environment in the catastrophic-exposed markets though -- Florida, the coast? Is it -- it's a little better than it is in other sectors of the country?

'Better' meaning higher rates relatively?

Yes.

No, I mean, candidly, the 9/06 season followed by -- you hear me rapping on the wood because I guess officially the hurricane season is not over yet -- but followed by what has been a great year in terms of no events in '07, I think has created a lot of the short-term thinkers, or has pushed them back into an aggressive mode. And I wouldn't characterize the opportunities in catastrophe pricing a great deal different than the competitive pressures we're seeing in Casualty and Professional Liability and the rest of the Property lines really.

Okay. And just one final question, in Europe on the floods in the UK, did you all have much exposure there?

I'm sorry, I didn't -- what about the UK?

The flood.

No. As a matter of fact we had had a book of domestic property up until a couple of years ago, which would have given us a fair amount of involvement, but we became disenchanted with the pricing levels, and good fortune, we got out of it. We didn't get out of it because we knew the flood was coming (inaudible), but we're no longer in it.

Okay, thank you.

Jay Cohen with Merrill Lynch.

Thank you. Questions on capital. The top line has been shrinking. You're obviously generating a lot of capital from an ROE standpoint. And obviously, your goal is to grow book value over time and you're buying back stock at 2 times book doesn't help you in that regard. Does that factor into your capital management, as the fact that book value -- the buyback are diluted to book value per share?

Well, we're certainly conscious of what the stock price is. Today we're thrilled to be building capital and we believe that in the course of the next 1, 3, 5, 10 years we'll have more than enough opportunities to invest that capital intelligently.

We have the lever of allocating more to equities as we have done in the past and continue to do. We've made some small private equity investments, as you're aware of, Jay, that have proven to be very, very successful. And as the (inaudible) world and the private equity world gets more interesting, we expect to see more opportunities there.

We're still a very, very small player in the total worldwide Property and Casualty insurance industry, and so, our ability at the right time and the right circumstances to use our capital, (inaudible). There won't be a shortage of good opportunities. We're seeing them today. There are others who are hungrier and willing to pay higher prices in some cases maybe than us, but our time will come and we'll have an opportunity to swing at one of these pitches. But we don't need to swing at them all; we only need to swing at the ones that make sense.

And so, having some dry powder is a good thing. The option to allocate more to equities is a good thing. And if we really work and strain, at some point in the next 5 or 10 years we could also pay back dividends as a way of rewarding all of the shareholders equally rather than paying a price for stock that might be higher than we think is appropriate.

I happen to think price book is a fair price, so spending excess capital at a fair price is not a bad thing for our shareholders, so it's not far away from a fair price, and so, it's still an option.

It really doesn't sound like buyback is really much on the table, which is fine. It sounds like you'd rather hold onto the capital, take a bit longer term than a typical investor would these days.

We've always thought a little big longer term, yes.

Exactly! And then frankly, you've been good stewards of capital over the years, so I just wanted to make sure I understood the philosophy.

Yes, it hasn't changed.

Okay. Second, maybe for Tom Gayner, you're a value-conscious investor. Some financial sectors are really getting decimated -- Financial Guarantors as an example. Any interest in dipping your toe into some of the more, I'll call them 'value-oriented' areas at this point within financials?

Yes. Historically, that's been an area where we have invested and done well, and I do happen to agree with you that the financial sector, broadly speaking, is pretty attractive. I recognize that it's a nuance argument and not one where you should think anybody is all right or all wrong no matter what side of the trade they're taking. But I was in a discussion this morning and I said, "If you took a basket as a kind of five or six or 10 names that we could come up with of financial companies that are sort of in the publicity crosshairs right now, I'd be willing to bet every dime I have or ever will that five years from now the prices of those things will not be the same. They'll either be two or three times what they are right now, or gone. And I think the 80% case is that they will be significantly higher than what they are right now, so we are indeed dipping a toe, maybe an ankle, and maybe some calve, in the water of that pond. I do think that's an attractive area.

They're getting smashed again today. Well, thanks for the answers, guys.

Meyer Shields with Stifel Nicolaus.

Thanks. Good morning, everybody. One quick question, I guess, for Tony. If we take off the reserve releases in the international segment, it looks as though we come out with over 100. Is any of that due to investments in new (inaudible) areas?

I'm not sure I heard the last part of that.

The reason we're over 100 on the current accident year is a couple of things in the quarter. We strengthened those accruals in the quarter because of the fantastic year we're having in London, so that sort of hits the quarter results.

But also, with the price competition in the market we're trying to be very cautious in terms of our initial loss picks on the current accident years. There is a pretty significant margin that we put in there for the fact that prices are deteriorating, so we're trying to be cautious.

Okay.

We would believe that our international business is operating at an underwriting profit over the long term today.

Okay, that's helpful. I guess, if I could ask one more question on Richie's comments at the beginning. You said that last year's accident period loss ratio was 59% and it's up to 61% this year. Right now, considering the reserve releases you've had on accident year '06, could you advise us to where your current estimate of last year's accident year loss ratio is?

I wouldn't have that with me. No, I don't have that with me right now, sorry.

Oh, okay, fair enough. And one last, I guess, I think it's a question for Tom. If I assume that underwriting and realized capital gains are taxed at a 35% rate, then the taxes on investment income we have to assume everything else, seems to have jumped in the quarter. Am I missing something or should we anticipate a higher tax rate on net investment income from this point?

I'm going to let Richie answer that question.

Could you repeat it? I'm sorry Meyer.

Sure. What we try to do is we take out -- we assume that everything other than net investment income has a 35% tax rate and then we back into what the apparent tax rate on net investment income is. It's been hovering in the mid-20s for the past couple of quarters and then it jumped to almost 32% this quarter. I'm wondering if there is something else to process or if there's been a change in the allocation to tax advantaged securities.

I think maybe what is happening is, as Tom has mentioned in the past, we have a pretty significant allocation to equities. Obviously, several of our equity positions have significant dividend yields, and depending on the quarter in which they declared their dividends, we'd recognize those dividends. And I think that might be causing the jump around in the tax rate in terms of the investment portfolio, the way you're looking at it.

Okay, that's helpful. Thanks a lot, guys.

John Fox with Fenimore Asset Management.

Okay, thank you. Hello everyone. I have couple of questions for Tom to start. Tom, you have been talking a number of years about the changes that will be coming to private equity and you're maybe a little bit early, but those changes appear to be occurring. And I'm just curious if you see more opportunities now to make private investments? Is your activity level high? Could you just maybe expand on what the opportunities are now?

Well, thanks. Yes, I was a little early that normally the [vees] that I have and the way we counteract that is I tend to go very, very slow to have the dollars be relatively small during the early part of the learning curve. And the total private equity investments that we have so far would be on the order of $50, $60 million, something like that. So, relative to a $7 billion portfolio, or even a $1.8 billion equity denominator, it's a relatively small set we've taken so far, point #1.

Right.

Point #2, in terms of activity level, yes, it has picked up. We do see sort of deal flow like with [Echo's] [Cooney's] comments that he made about sort of the acquisition opportunity, the seller's mentality has not changed yet, but it is changing. And we're seeing things and talking to people and looking at some pretty good businesses and local relationships and things of that nature. And I would say that you will continue to see us proceed in a crawl/walk/run fashion.

Okay. And do you have (inaudible) for equities in the quarter?

Not in front of me, no.

Okay, we can get that.

It wasn't very much.

Okay. And for Richie, is there anything you would categorize as catastrophe losses in the quarter? I mean, we did have some hurricanes that didn't hit the United States, but --

If we had anything it would be fairly minimal and wouldn't have really impacted the numbers.

Okay. And then for Steve, you talked about the balance sheet, which I agree looks wonderful. You're also, I think, running at the lowest investment leverage that I can remember and can you just talk about the reason for that? I know underwriting profits are high right now, but is that a conscious decision to just build like a [fortress] balance sheet, or is there something else going on?

Well, at the end of the day the growth in capital is coming faster than the growth in the investment portfolio, and that's causing the 3:1 leverage, which, at yearend, I guess was 3.3 and two or three, or four years ago it was up to 4:1.

Right.

Additionally, the historic leverage has been very closely related to some of our acquisitions where we'll buy this and it's generated a leverage portfolio based upon writing, let's say $1 billion worth of premium. And our modis operandi has been to come in and get rid of all the bad business, and six months later or a year later we have a $500 million business.

But it still has a $1 billion balance sheet. And in managing the runoff of those discontinued lines and getting the reserves right on those discontinued lines, we've had the benefit of sort of leverage from acquisitions that's not really related to leverage from normal operations.

And so, in the last couple of years, in our case specifically, we've done a great job of managing the runoff of the Markel International business. We've collected a lot of the old reinsurance balances. We've commuted a lot of the old treaties, cleaned it up, and the effect of that is that part of that leverage is declining.

Offsetting it is we have less risk on runoff operations. And so, it's not as apparent, but there is an inherent benefit in the financial operations.

The model that we use, at the end of the day, whether the leverage is 2:1, 3:1, or 4:1, doesn't really matter because what's important is that we're conscious about calibrating the classes of business we write and the underwriting margins from those specific businesses necessary to justify a high return on capital.

And so, we will continually look for higher underwriting margins from short-tailed businesses that do not contribute to the financial leverage. And to some extent that's also happened over the last several years where we've written a larger percentage of our underwriting has been related to short-tailed Property exposures or to catastrophe-related exposures where the claim cycle is fairly short.

In those classes of business we fully expect the run ratios in the low 90s because of the fact that those either catastrophe exposure or because there is less investment leverage related to those products.

So, 3 to 1, (inaudible), 3 to 1 is not a bad place to be. We should manage it in the long term based upon -- the business expectations today, I think, we would expect for the next couple of years fairly modest top-line growth in this environment and so, in the short line, I would hope and expect that that ratio will be stressed and that the capital will be growing at a very, very fast rate and the portfolio will be growing at a slightly slower rate.

But, over time, I think we will find other opportunities.

One point to add to that, John, is that in the old days of a 4:1 kind of leverage ratio, when you think about the fact that we match all the insurance liabilities against the fixed income portfolio and take the residual and have that as the amount that's matchable equity securities, that's suggested sort of an 80/20 kind of allocation between fixed income and equities. As it comes down to 3:1, instead of 20 or 25% being available for equities, that number sort of naturally goes up to 33% of the entire portfolio.

Right.

Any event overnight, but it does sort of point you in a particular direction where you can richen up the total investment portfolio of returns over time to support the compound (inaudible).

And John, one other point, without belaboring the subject, although I don't want to give you the impression that we operate in a vacuum and can be completely cavalier from an operational standpoint, but I will tell you that our combined ratio targets are not static, and they are sensitive to the investment environment and they are adjusted accordingly. We can't be impervious to the marketplace and be so cavalier, but our combined ratio targets do move, given our ROE objectives and with sensitivity to the investment portfolio.

Okay, that's a very complete answer. I'm just curious, the Specialty admitted segment seems to be holding up pretty well, at least it did in the quarter. The last few quarters it's held up pretty well. Is there anything special going on in there, or did you make some acquisitions? Or, it just seems to be holding up pretty well in a soft market.

No, I think realistically that the fluid nature of the [circles line] market, which in some respects and some of its products is more of a safety valve type situation, depending on the appetite of the standard markets, is generally the major beneficiary of a tight market and the major victim of a soft environment. And I would expect our standard Specialty lines, our admitted Specialty lines, although I'm not going to suggest that they're not under competition, but I would expect them to be a little bit more stable without quite the ups and downs that we experience in sort of the circles lines environment.

So, it's more like the standard carriers have come back in the E&S market and you're seeing that go down more.

That, and the capital that went -- that was raised post KRW that was not able to realize full deployment in the Cap area and the growing appetite of the Bermuda and the UK markets in terms of U.S. subsidiaries. A lot of (inaudible)going on in that same (inaudible).

Okay. Thank you.

Kenneth Billingsley from Signal Hill.

Good morning. The first question I have is just on the 10-Q that you filed last night. Just on the effective increase that you recorded of about $34 million. Is that on experience, or was that on something you were seeing in the general market?

It's probably two parts to it. We did see -- we did make some specific adjustments to cases that we had in the [door] where we wanted to be more conservative in terms of what we were seeing in terms of injured parties in the suits. There were specific cases that we strengthened.

And then the other part of it was it's just simply some of the methods we'd look at, take into account some of the most recent payment history the last few years and extend that out into the future in terms of coming up with IBNR. And so, we're saying maybe some of those cases that still aren't in the door could be more expensive, could be larger.

And so, that really made up the $34 million.

Would the majority of it be IBNR related though?

It's all IBNR. Well, sorry, excuse me, some of it is case specific, but it's still in a sense IBNR. My guess is probably one-third/two-thirds -- one-third case-like/two-thirds IBNR.

Okay. Another question I have is, just looking at the balance sheet, looking at the total loss reserves, for about seven quarters -- the last nine quarters -- seven quarters we saw that net -- or total loss reserves had been declining. And in the last two quarters we've been seeing that trend start to go up. Could you just comment on what maybe is changing fundamentally? It looks like reinsurance recoverables are flat to down. And what's really going on in the conditions that's causing just that line item to reverse the trend we saw before?

Some of it is probably the fact that we're increasing the pick on the current accident year. That will be some of it. Also the fact that we've had pretty good, in terms of payment trends, that's been pretty good. Especially at Markel International payment trends have been down there quite honestly, so that might be leading to some of the increase in the reserves.

Also, some of it is going to be effects, quite honestly, with the foreign currency strengthening against the dollar, the loss reserve numbers get larger, so that -- all those things would lead to larger loss reserves.

And it's because you keep your reserves on the business run outside of the U.S. in the foreign currency.

Yes, that would be in the currency. So, all of our UK business we write, those losses are net increase in terms of when we try and write that back to dollars, so that's probably part of it as well, just the weakness of the dollar in the last year.

And, off the top of your head, could you give a percentage approximately of reserves are held in non-U.S. dollars?

Oh, off the top of my head, no, I wouldn't want to try off the top of my head. If you would like to call us later we could (inaudible) together.

The last question is if you could comment a little bit more on the cautionary comment you had on page 19 of your 10-Q when you're discussing reserve redundancies and expectations going into 2008. I think a lot of people might understand that reserve relief is not going to be there indefinitely, but it seems that you devoted a significant portion of the 'Q' to that. Could you talk about why you felt that was important to put in the 'Q' at this time?

Well, I guess, the first thing I would say is that obviously, it's been the last several years now where there's been nice sizable reserve releases coming out of the prior years. We've been trying to caution everybody that the market is getting tougher and also caution that that will have some impact on future releases.

So, two things we're trying to get across there, just simply the fact that the pricing environment is getting tough, which could impact our ability to have releases in the future. Also the fact that those very strong years that we saw during the hard market, at some point that ends out, the end.

And I think Steve probably said it best and it's worth noting. I think in terms of our confidence level in our reserves, the strength of the reserves on the balance sheet, they're every bit as good today as they were a few years ago. In fact, possibly, maybe a little bit stronger today. We're happy with the reserve position we have as we've ever been at Markel.

And I'll give you a specific kind of example, and I'm maybe overstating it. This is intended more to just sort of highlight the intent of the comment. But, if, for example, in our Professional Liability 2002 year book of business for Medical Malpractice, our ultimate results are -- and we'll pick a number -- let's say it turned out to be 35 or 40% loss ratios and we originally booked them at 60% loss ratio. We're getting for the 2001/2002 year pretty close to what it's ultimately going to be now that it's six years later. In that particular (inaudible), isn't going to have a whole lot of room when the book reserves are equal to the actual paid reserves.

And so, what's uncertain is, so now we know that the margin of safety proves to be redundant by x-points for that year for that product line. We're many years late for knowing what the ultimate outcome for 2005 and 2006 are. We believe that we had a similar approach with a similar amount of due diligence and a similar margin, but quite frankly, we don't expect that 2006 year for some of those product lines to be as good as the 2001 year turned out to be.

There is a caution. But we do expect the trend to continue, that it would be positive and we tend to want to make our mistakes so they're too high and not too low.

And just a follow-up on just that right there. I'm going to ask you to generalize possibly, but would you say that with peak pricing occurring somewhere around '04 and really strong terms and conditions that '05 may have been like kind of the best year overall from a profitability and pricing standpoint? And that from there we might conclude when we're going to start seeing the contraction?

It's going to vary by product line. There is certainly some that would fit the models you just described, but there are other products where that cycle has been slightly different. And there is some where the results in fact have been very, very consistent. And so, to generalize across 100 different products, it's really -- it doesn't really convert very easily.

That's fair. Well, congratulations on yet another again strong quarter.

Mark Dwelle from Ferris, Baker Watts.

Good morning. Most of my questions have already been covered, but Tom, could you go over again -- I think I missed what your returns were for the year to date. I heard the total return, I think, was 2.9%, but what was the mix for equity and fixed income?

The 2.9% was equity.

I'm sorry, then.

The total return was 4.2%, which included the effects of that, from the bonds that we had that are denominated in foreign currency. Which, to answer an earlier question of what we have to match against the reserves of business that we write in foreign currency.

I'm sure the remainder then would be the fixed income.

That is correct.

Okay. The only other question I had kind of generally relates to the discontinued segment. The last caller asked about the $34 million of the A&E reserve. There was a pretty sizable onset against that. What did that relate to?

It was two or three things, Mark, but the bottom line, it was other -- we've been in London now since March of 2000 and have been running off as a legacy reserve and we've worked really hard to sort of get rid of the bid nasty issues. We're getting down to sort of the rump, if you will, of those legacy reserves. And we're starting to see some redundancies come out of some of the conservatives that we set early on when it was difficult times.

Well, all of it was actual redundancies. There were no commutations or anything like that?

Nothing related to commutations. It really was redundancies in that sort of pre-2001 socket at Markel International.

Okay, sounds good. Thanks.

Gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much and I'd like to thank all of you for participating today. If any of you have any further questions or comments, we're always open to hear from you directly as well. We want to thank you very, very much for your support, both over the recent past and over the long term and thank you for participating today. We wish you a great day and take care of yourself.

Ladies and Gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.